China bank pay is the wrong target for reform

April 24, 2012

By Wei Gu

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

While Western banks get criticised for rewarding failure, those in China are doing the opposite. Despite robust earnings growth, some top-paid Chinese bank heads took home less last year. This may be a response to public discontent over widening income gaps and a lack of competition in the banking sector. It doesn’t really address the problem.

Chinese banks have thrived because they get a guaranteed spread between deposit and loan rates. The industry’s net earnings rose 36 percent year-on-year to hit a record of $165 billion in 2011, according to the China Banking Regulatory Commission. That is a drain on other parts of the economy. Earnings of the 13 China-listed banks that have reported accounted for almost half of the total earnings of 1,800 listed companies in 2011, according to Thomson Reuters. Hong Qi, president of Mingsheng Bank, has said the mid-sized lender’s 59 percent earnings growth in 2011 were “embarrassingly high”.

At some banks, top earners saw steep cuts. The chairman and president of Minsheng, a mid-sized non-state bank, each took home $820,000 last year, a quarter less than in 2010. The chairman of China Merchants Bank got no raise, and the only top-paid banker with a sizable increase was a non-Chinese executive, who works at Shenzhen Development Bank.

Chiefs of the large state-owned banks got raises, but still received a pittance. Regulators cap their packages around $150,000 a year, so the gap with their peers in the government doesn’t get too big. The heads of China’s biggest state-owned banks are appointed by Beijing, and enjoy vice minister status. The 15 percent pay rise for the chairman of the Industrial and Commercial Bank and the 25 percent increase for the president of the Agricultural Bank thus raised few eyebrows.

This kind of populism comes with risks. Banks may find more creative ways to reward and retain their top bankers, such as through bigger perks and expense accounts – with the result that pay becomes less transparent. Rather than targeting CEO pay, China’s could try allowing more competition in China’s financial sector, say by easing restrictions for foreign and micro-lenders. It’s the banks’ excessively large profits that need a trim, not their bosses’ pay slips.

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